How to calculate EMI, and where the interest actually goes
An equated monthly instalment is equated in one sense only: the amount stays the same. What that amount is made of changes every single month, and understanding that is the difference between a loan you manage and a loan that manages you.
The formula
EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)
Where:
- P is the principal — the amount actually borrowed
- r is the monthly interest rate: the annual rate ÷ 12 ÷ 100
- n is the tenure in months
The 8.5% on your sanction letter is annual. Dividing by 12 gives 0.7083% a month, or 0.007083 as a decimal. Using the annual rate directly in this formula is the most common arithmetic mistake people make with it.
A worked example
A ₹50,00,000 home loan at 8.5% over 20 years:
P = 50,00,000
r = 0.085 ÷ 12 = 0.0070833
n = 240
EMI = ₹43,391 a month
Total repaid ₹1,04,13,879
Interest paid ₹54,13,879
You borrow ₹50 lakh and repay more than ₹1.04 crore. The interest alone exceeds the amount borrowed — which is not a scandal, it is what twenty years of compound interest costs.
Where each instalment goes
Every instalment is split between interest and principal. Interest is charged on the outstanding balance, so early in the loan — when the balance is at its largest — almost all of your payment is interest.
In the first month of that loan:
Interest = 50,00,000 × 0.0070833 = ₹35,417
Principal = 43,391 − 35,417 = ₹7,974
Of a ₹43,391 payment, under ₹8,000 reduces what you owe. It takes roughly twelve years before the principal portion overtakes the interest portion. By the final year, almost the entire instalment is principal.
This is why five years into a twenty-year loan the outstanding balance has barely moved, and why so many people are shocked when they first ask for a foreclosure statement.
Tenure is the expensive variable
Lengthening the tenure lowers the instalment and raises the total cost dramatically:
| Tenure | EMI | Total interest |
|---|---|---|
| 15 years | ₹49,237 | ₹38,62,656 |
| 20 years | ₹43,391 | ₹54,13,879 |
Five extra years saves ₹5,846 a month and costs ₹15,51,223 in extra interest. Whether that is worth it depends on what else the ₹5,846 does — but it should be a decision, not a default.
Why prepayment works so well
Because interest is charged on the outstanding balance, a prepayment removes interest on that amount for every remaining month of the loan. Its effect is largest early, when there are the most months left for it to act on.
Crucially, most lenders apply a prepayment by shortening the tenure rather than reducing the instalment, unless you specifically ask them to re-amortise. That is what you want: the EMI stays put and the months at the end — which were almost pure interest — simply stop happening. The prepayment calculator shows exactly how many months a given lump sum removes.
What the formula leaves out
The EMI is not the cost of the loan. Also expect:
- Processing fee, typically 0.5%–1% of the sanctioned amount.
- Insurance bundled into the loan, which quietly increases the principal you pay interest on.
- A floating rate. Most Indian home loans are floating. When the rate moves, lenders usually adjust the tenure rather than the EMI — so your instalment looks stable while the loan silently grows longer.
Check it against your own loan
The EMI Calculator gives the instalment, the total interest and a month-by-month schedule showing the interest and principal split for every payment. If you are still deciding how much to borrow, the loan eligibility calculator works backwards from what you can afford each month.